There doesn't seem to be a light at the end of the tunnel for McDonald's (MCD 0.36%), so the world's largest burger chain will try to find another escape route. McDonald's will be unveiling its turnaround strategy on May 4, and investors will be hungry for change.
McDonald's is coming off another rough financial report, and comps at stateside restaurants have posted year-over-year declines for six consecutive quarters. This doesn't mean that next month's big reveal will be fruitless. You can't pin the chain's fading ways since late 2013 on CEO Steve Easterbook. He just took the helm at McDonald's earlier this year, and before that he was actually successful as a rising executive at the burger giant, breathing new life into its European operations.
Some investors will argue that McDonald's doesn't need to be saved. As bad as things may appear to be fundamentally at Mickey D's, the stock is trading less than 6% below its all-time highs from 2013.
A lot has gone wrong since then. Revenue and earnings fell last year, and McDonald's kicked off 2015 with another year-over-year decline on both ends of the income statement. Analysts have been scaling back their forecasts in light of the eatery's woes, but they're not coating new layers of pessimism fast enough. McDonald's has fallen short of Wall Street profit targets in five consecutive quarters.
I sense a disturbance in the force
It's not just waning popularity on the front line that's stinging McDonald's. Its sloppy performance is making the rest of its financial statements look bad, and this actually goes back a couple of years. Return on Equity at McDonald's has fallen for three straight years since peaking in 2011, according to S&P Capital IQ data. Net profit margins that spent 2009, 2010, and 2011 above 20% have fallen into the teens the past three years.
Yes, it's a bit of a mess here. The stock has held up well largely on the blue chip nature of the brand and its fat dividend. McDonald's has boosted its dividend every year since initiating a payout policy 39 years ago. It's a streak that obviously can't continue if profitability keeps heading in the wrong direction, but for now the payout ratio is manageable given the low overhead associated with franchisee-fueled models.
Easterbrook will have his hands full at next month's big reveal. Will we get more restaurant closures than the 350 eateries worldwide that were shuttered during the first three months of this year? Will McDonald's be able to beef up automation and efficiency to lower staffing requirements in light of growing labor costs? Will there finally be menu changes that don't upset the stomachs and patience of its customers?
McDonald's should be doing far better than it is these days. Gas is cheap, so there's less guilt about snaking through a drive-thru lane. The employment and economic snapshots are improving, so there are more commuters on the road during breakfast and dinner hours. There's also the sandbagged performance at McDonald's through the past six quarters, making comparisons easier in the future. Then again, that trend should have resulted in a turnaround two quarters ago when the chain was bumping up against the first of its favorable year-over-year comparisons. It didn't happen, and now it's up to Easterbrook to justify why a company that seems to be getting worse with every passing quarter doesn't have a stock to match the disappointment. How the stock reacts on May 4 will go a long way to determining how short a hook Mr. Market will have with Easterbook.
